One and Done: What You Should Know About the IRA Rollover Rule ChangeMay 20th, 2015
The Internal Revenue Service (IRS) has changed its position on the IRA (individual retirement account) rollover rule. Starting in 2015, it's "one and done"—the IRS limits people to one rollover in a 12-month span, no matter how many IRA accounts they own. They still may make unlimited trustee-to-trustee IRA transfers. Dennis Zuehlke, compliance manager for Ascensus, a retirement and college savings service provider, explains that in 2014, U.S. Tax Court ruling Bobrow v. Commissioner limited individuals to one IRA rollover in a 12-month period. The ruling was a surprise because the IRS had, for more than 30 years, observed a proposed regulation—yes, a regulation that remained in the proposed stage for more than three decades—that generally permitted a taxpayer to roll over each IRA he or she owned once in a 12-month period. The IRS provided detailed examples supporting this interpretation in Publication 590, "Individual Retirement Arrangements," a reliable resource for taxpayers and tax advisers for years. But last spring, the IRS released Announcement 2014-15 indicating it will apply the Tax Court's interpretation of the rollover rule to all IRA distributions taken on or after Jan. 1, 2015. This is a significant change. Ultimately, it's an IRA owner's responsibility to comply with the one-in-12-month rollover rule. And unlike other IRA missteps, the IRS doesn't allow a "do over" for rollover rule violations, accidental or otherwise. If you make an excess contribution to an IRA, you can withdraw it before the deadline. If you contribute to the wrong type of IRA, you can recharacterize the contribution. But starting in 2015, if you withdraw from multiple IRAs with the intent to roll over the distributions you will face tax consequences.
A rollover from a traditional IRA into a Roth IRA—a "conversion"—isn't subject to the one-rollover-a-year limit.And those tax consequences could be costly. Say you are a 62-year-old IRA owner who has traditional IRAs at three financial organizations, with a balance of $70,000 in each account. You want to consolidate the three accounts into a new IRA. Before 2015, you could take a distribution from each IRA, then roll over the assets into a credit union IRA, for example, within 60 days of the date of distribution—as long as none of the three accounts had been rolled over in the previous 12-month period. Now, only one of the three distributions is eligible for rollover and you must treat the other two distributions as taxable income. Even if you are in the lower tax brackets, adding $140,000 to taxable income results in a substantial tax bill. IRA distributions made at the end of 2014 in which the 60-day rollover period extended into 2015 won't be subject to the "Bobrow" interpretation. And a rollover from a traditional IRA into a Roth IRA—also known as a "conversion"—isn't subject to the one-rollover-a-year limit. The IRS will update Publication 590 to reflect the new interpretation. You can talk to an IRA specialist at your credit union for guidance on this and other IRA topics. Neither the publisher nor the author of this article is a registered investment adviser. Readers should seek independent professional advice before making investment decisions.